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Homework #3 (chapter 6) Answer Section MULTIPLE CHOICE 1. ANS: E (there is a typo: 2008 to 2013 should read 2011 to 2016) Step 1: Calculate the DRP and LP using information for the 5-year bond: r = r* + IP + DRP + LP + MRP. For the 5-year corporate bond: 7.5% = 2% + (2% × 5)/5 + DRP + LP + 0.1%(5 - 1) 7.5% = 2% + 2% + DRP + LP + 0.4% 3.1% = DRP + LP. Step 2: Calculate the average inflation rate for 2011 through 2016 by substituting the information found in Step 1 using data for the 10-year corporate bond: 8.2% = 2% + (2% × 5 + 5X)/10 + 3.1% + 0.1%(10 - 1) 8.2% = 2% + (10% + 5X)/10 + 3.1% + 0.9% 8.2% = 6% + (10% + 5X)/10 2.2% = (10% + 5X)/10 22% = 10% + 5X 12% = 5X 2.4% = X. PTS: 1 DIF: Medium/Hard OBJ: Part I TYPE: Problems TOP: Inflation rate 2. ANS: A We're given all the components to determine the yield on Gator Corp. bonds except the default risk premium (DRP) and MRP. Calculate the MRP as 0.1%(10 - 1) = 0.9%. Now, we can solve for the DRP as follows: 8% = 3% + 2.5% + 0.9% + 0.5%

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